Preparing fiscal consolidation

Governments and central banks have implemented wide-ranging support packages in response to the global crisis. Discretionary fiscal measures, coupled with cyclical revenue losses and expenditure hikes, have resulted in a sharp increase in budget deficits, which are projected to peak at 8¼ per cent of GDP in the OECD area as a whole in 2010. OECD-wide gross government debt is likely to exceed GDP in 2011, about 30 percentage points higher than before the onset of the crisis. Post-crisis fiscal consolidation needs are therefore unprecedented in several countries.

Drawing from the analysis reported in recent editions of the OECD Economic Outlook (June and December 2009), this note summarises the OECD assessment of fiscal policy developments after the crisis.

Many governments are already preparing exit strategies to ensure longer-term fiscal sustainability. OECD projections suggest that countries should be in a position to begin to withdraw fiscal support by 2011 at a pace that is contingent on the recovery and the state of public finances, as well as on the scope for monetary policy to provide support to the economy, if needed.

Fiscal consolidation should privilege growth-friendly instruments as much as possible. While expenditure cuts are needed, fiscal retrenchment should preserve pro-growth programmes, and there is much scope for making government spending more efficient in many countries. Tax hikes should rely on the least growth-distorting instruments, such as taxes on immobile bases. There could also be greater recourse to green revenue, including receipts from green taxes and carbon trading, which would yield a double dividend of contributing to fiscal consolidation and encouraging green growth.